Torrid Holdings Inc. annual report, FY2023

Torrid Holdings Inc. — Form 10-K Summary

Reporting period: The filing is the Annual Report on Form 10-K for the 53-week fiscal year ended February 3, 2024, referred to as fiscal year 2023. The requested “2022 Q4” period is not the filing period; the filing presents annual results and comparative fiscal-year data for January 28, 2023 and January 29, 2022.

Business Context

Torrid is a North American direct-to-consumer apparel, intimates and accessories brand serving women generally wearing sizes 10 to 30. It operates an integrated store and e-commerce platform, with 655 stores in the United States, Puerto Rico and Canada at fiscal year-end. E-commerce represented 59% of net sales, down from 61% in fiscal year 2022.

Fiscal 2023 included a 53rd week, which contributed approximately $21.7 million of net sales and $12.9 million of costs.
Active customers declined to 3.761 million from 3.902 million.
Net sales per active customer declined to $306 from $330.
Comparable sales declined 12.0%, while the store base increased by 16 locations, or 2.5%.

Financial and Operating Metrics

Metric	Fiscal 2023	Fiscal 2022	Change
Net sales	$1,151.9 million	$1,288.1 million	Down 10.6%
Gross profit	$406.0 million	$459.5 million	Down 11.7%
Gross margin	35.2%	35.7%	Down 50 basis points
Income from operations	$57.1 million	$101.6 million	Down 43.8%
Operating margin	5.0%	7.9%	Down 290 basis points
Net income	$11.6 million	$50.2 million	Down 76.9%
Net margin	1.0%	3.9%	Down 290 basis points
Adjusted EBITDA	$106.2 million	$152.4 million	Down 30.3%
Cash flow from operations	$42.8 million	$53.3 million	Down $10.5 million
Capital expenditures	$26.0 million	$23.4 million	Up $2.6 million

Cost of goods sold was $746.0 million, or 64.8% of sales, compared with 64.3% in the prior year. Selling, general and administrative expense declined 1.6% to $293.3 million but increased to 25.5% of sales from 23.1% because of deleveraging and higher headquarters costs. Marketing expense declined 7.4% to $55.5 million but increased slightly to 4.8% of sales.

Cash, Debt and Liquidity

Cash and cash equivalents were $11.7 million at February 3, 2024, compared with $13.6 million at January 28, 2023. Including restricted cash, period-end cash was $12.1 million.
Total debt, net of original issue discount and financing costs, was approximately $312.0 million, consisting primarily of $304.7 million under the term loan and $7.3 million under the ABL facility.
The term loan matures June 14, 2028, bore interest at approximately 11% at fiscal year-end, and requires $17.5 million of scheduled principal repayments annually through fiscal 2027, with $240.6 million scheduled in fiscal 2028.
ABL availability was $102.7 million against $7.3 million of borrowings; outstanding standby letters of credit were $11.4 million.
Estimated operating lease obligations, including periods covered by extension options, totaled $243.1 million.
Total contractual obligations were $920.0 million, including debt principal, estimated interest, purchase obligations, letters of credit and operating leases.
Management stated that operating cash flow and available ABL borrowings are expected to fund working capital and anticipated capital expenditures for at least the next 12 months, but noted that future availability and cash generation are not assured.

Material Changes Versus the Prior Comparable Period

Sales weakened materially, primarily because of fewer transactions, lower active-customer spending and a 12% comparable-sales decline.
Gross margin contracted modestly because of higher store occupancy, depreciation and merchandising payroll costs, partly offset by improved pricing and lower e-commerce shipping costs.
Operating income and Adjusted EBITDA declined substantially despite lower SG&A and marketing spending.
Interest expense increased $9.5 million to $39.2 million, primarily because of higher variable interest rates.
Inventory declined to $142.2 million from $180.1 million, while accounts payable declined to $46.2 million from $76.2 million.
Operating cash flow declined, while capital expenditures increased as Torrid opened additional stores and invested in its infrastructure.
Torrid implemented a headquarters workforce reduction of approximately 5% in July 2023 and recorded $1.5 million of related expense.
The company made no share repurchases during fiscal 2023. Approximately $44.9 million remained under the $100 million authorization at year-end.

Guidance, Outlook and Management Commentary

The filing does not provide a clear numerical revenue, earnings or Adjusted EBITDA forecast for fiscal 2024. Management intends to continue investing in brand awareness, customer engagement, digital and store capabilities, technology, product development and selective store expansion. Management also expects operating expenses to increase as it invests in marketing, personnel, technology, operations and customer experience.

Management identifies inflation in wages, transportation and product costs, softer consumer demand, customer-acquisition costs, inventory management and interest rates as significant factors affecting performance. The company expects its generally low seasonality to continue, although Adjusted EBITDA historically has been strongest in the first half of the year.

Risks, Contingencies and Unusual Items

High leverage and substantial lease obligations could restrict financial flexibility. Debt agreements contain covenants limiting additional debt, investments, dividends, repurchases and other corporate actions.
Variable-rate debt creates material interest-rate exposure; a 1 percentage-point change in rates would affect annual interest expense by approximately $3.1 million on term-loan borrowings.
Approximately 98% of fiscal 2023 product receipts were sourced internationally, and approximately 53% were sourced from China, creating exposure to tariffs, geopolitical developments, labor costs and supply-chain disruptions.
Consumer demand, inflation, competition, mall traffic, digital advertising costs and changing fashion preferences could affect sales and margins.
Inventory valuation depends on estimates of future selling prices, markdowns, shrinkage and demand. Inventory of $142 million was identified as a critical audit matter.
The company faces securities class-action and shareholder derivative litigation alleging misleading statements related to its IPO and subsequent disclosures. The company states that the allegations are without merit; the probability and potential loss cannot presently be determined.
The CFPB issued a March 2024 rule addressing credit-card late fees. If effective, it could reduce income streams to Torrid’s third-party financing partner and potentially affect the private-label credit-card relationship.
No known cybersecurity incidents had materially affected, or were reasonably likely to materially affect, the company as of the filing date, but cybersecurity, privacy and third-party-system risks remain material.
Sycamore controlled a majority of voting power at fiscal year-end, making Torrid a controlled company and creating potential conflicts with other stockholders.
The company has never paid cash dividends, and debt agreements currently restrict distributions.

Important Facts for Investors to Verify

Whether sales, active customers and net sales per customer stabilize after the fiscal 2023 decline.
Whether gross margin can recover despite occupancy, labor, sourcing and freight-cost pressures.
Cash generation relative to the $17.5 million annual term-loan amortization, approximately 11% borrowing cost and lease obligations.
Available borrowing capacity and compliance with ABL and term-loan covenants under weaker operating conditions.
Inventory aging, markdown exposure and the adequacy of the $142.2 million inventory valuation.
Potential financial or reputational effects from the pending securities and derivative litigation.
The effect of CFPB credit-card rulemaking on PLCC Funds, which represented $34.0 million of fiscal 2023 net sales.
Related-party transactions, including $56.5 million of fiscal 2023 merchandise purchases from MGF Sourcing US, an entity indirectly controlled by Sycamore affiliates.